adjustable rate mortgage

LIBOR – CFPB Proposes Amendments to Reg Z to Facilitate Transition

We have all heard that the LIBOR index may no longer be available after 2021 and over the past year TCA has received many questions regarding the transition from the LIBOR. How do we prepare? What is the replacement index? Is there advance notice required?

On June 2, 2020, the CFPB released three items related to the LIBOR transition and the sunset of the LIBOR:

  • A proposed rule to amend Regulation Z to address the sunset of the LIBOR.
  • FAQ Guidance addressing LIBOR transition topics.
  • Revised CHARM booklet to provide updates based on consumer testing and to remove LIBOR-based rate examples. The updated version of the CHARM booklet may be used effective June 9, 2020, or when the creditor first exhausts their current supply. When reprinting the booklet, the most recent version should be used.

Comments on the proposed rule to amend Regulation Z are due on August 4, 2020. Remember, the rule is not finalized yet; TCA will provide an article on the amendments to Regulation Z once they are finalized.

For now, here are the highlights of the proposed rule:

The Bureau is proposing that the spread-adjusted Secured Overnight Financing Rate (SOFR) as recommended by the Alternative Reference Rates Committee (ARRC) be utilized as a comparable index for closed-end loans.

The Wall Street Journal Prime and certain SOFR indices would be suitable replacement indices for Home Equity Lines of Credit and credit cards. As early transition could be beneficial, the proposed amendment would permit the LIBOR transition to begin as early as March 2021.

HELOCs, Open-End Reverse Mortgages and Credit Cards

Amending the open-end change-in-terms notice provisions to ensure that for the LIBOR transition, creditors are required to include the replacement index and any adjustment margin within the notice, regardless of whether the margin is being reduced or increased. Creditors to optionally comply between the date of issuance of the final rule and the provision effective date of October 1, 2021. [1026.9(c)]

For HELOCs currently utilizing the LIBOR, language would be changed to permit the transition from the LIBOR as early as March 15, 2021, as opposed to the date that the LIBOR is no longer available. [1026.40(f)(3)(ii)(B)]

The proposed LIBOR-specific provision generally would identify December 31, 2020 as the date used for selecting the index values for the LIBOR index and the replacement index in comparing the rates when using the LIBOR exception rather than using the index values on the date the original index becomes unavailable, and would allow the LIBOR transition to occur on or after March 15, 2021. [1026.55(b)(7)(ii) and 1026.59]

Closed-End Mortgages, Student Loans and Other Closed-End Consumer Loans

Under the current rule, if a comparable index is not chosen when the index of a variable rate closed-end loan is changed, the index change may constitute a refinancing. The proposed rule would provide an example of an index that is a “comparable index.” [1026.20(a); Comment 20(a)-3.ii]

TCA is A Better Way. We are committed to keep you updated on the ever-changing regulatory environment. Stay tuned for an article on our Fond Farewell to the LIBOR later this summer!

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